How Effective are Non-Banks During a Crisis

Abstract

Using a novel comprehensive dataset of business loans originated by banks and nonbanks, I provide new evidence that in contrast to banks, nonbanks and fintech lenders are cyclical lenders in the business loan market. I also show that nonbanks refrain from lending even in the presence of local uncertainty shocks. The cyclicality is not due to demand factors and is exacerbated by both the funding problem of nonbanks and their aversion to uncertainty. The cyclicality is more pronounced for platform lenders , which have severe funding problems during crises due to the lack of balance-sheet lending. Nonbanks decrease lending to riskier borrowers more than banks during times of aggregate and regional uncertainty, and most importantly, this cyclicality has real impact on borrowers of nonbanks. Overall, my analysis demonstrates the volatility of the non-bank lending model in the face of a crisis. Non-banks substitute for banks in the presence of small shocks but not in the presence of bigger economic shocks. Due to the stickiness of lending relationships, the volatile nature of nonbank lending have adverse welfare effects, and hence, there might be a need for policy intervention.